Insurance What Is an Ex Gratia Payment? By Lorraine Roberte Lorraine Roberte Lorraine Roberte is an insurance writer for The Balance. As a personal finance writer, her expertise includes money management and insurance-related topics. She has written hundreds of reviews of insurance products. learn about our editorial policies Updated on May 31, 2022 Reviewed by Khadija Khartit Reviewed by Khadija Khartit Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder. learn about our financial review board Fact checked by Jane Meacham Fact checked by Jane Meacham Jane is a freelance editor for The Balance with more than 30 years of experience editing and writing about personal finance and other financial and economic subjects. learn about our editorial policies In This Article View All In This Article Definition and Examples of an Ex Gratia Payment How an Ex Gratia Payment Works What Do Ex Gratia Payments Mean for You? Photo: Hispanolistic / Getty Images Definition The Latin term “ex gratia” means by favor.” When you receive an ex gratia payment from your insurer, you’re receiving payment for a loss that the insurance company didn’t technically have to cover under your policy’s terms. Key Takeaways Ex gratia payments are voluntary payments that an insurance company may send if your policy doesn’t cover your claim. This payment doesn’t mean that the insurer accepts liability for the losses. It is strictly paying out as a favor to the policyholder. Ex gratia payments aren’t typical, as there is no requirement for insurance companies to make them. Definition and Examples of an Ex Gratia Payment An ex gratia payment is a voluntary payment from an insurance company or other entity, such as an organization or the government, that it isn’t legally obligated to pay. With an insurance company, this payment is directly related to a loss not covered under your policy terms. Note It’s essential to regularly review your insurance policies to ensure you have the coverage you need so that your family and belongings aren’t at risk. An ex gratia payment doesn’t require the insurer to admit it’s liable for a loss or imply that the insurer’s payout was legally obligated. It’s strictly a voluntary payment made by the insurance company, sometimes to cut its losses or to maintain your business. How an Ex Gratia Payment Works An ex gratia payment is different from a traditional claim payment because it’s a payout that you aren’t eligible for based on the terms of your policy. Note If there is a legal obligation on behalf of the insurance company to make a payment, the money wouldn't be an ex gratia payment, it would be a normal payment from the claims process. For example, let’s say that you’ve been a loyal customer of your home insurance company for years. You thought you had the water coverage you needed in place via your flood insurance coverage. But then a sewer line backs up and causes flooding in your home. You’re surprised to learn your policy doesn’t cover this damage because the sewer backup wasn’t caused by a flood. You think your policy should cover the damage. But the specific terms don’t cover this type of flood damage. Because the insurer doesn’t want to lose your business, it may decide to send you an ex gratia payment to help cover some of your loss. In this example, the insurance company had no obligation to give you anything. However, it decided to do so as a kindness to help a loyal customer during a challenging period. Note Because there was no admission of liability for an ex gratia payment, claims are paid as a business accommodation by the underwriting department. These types of payments don’t affect a customer’s claims history like an actual claim payment would. Why Do Ex Gratia Payments Exist? If your claim is denied based on your policy terms, the insurance company isn’t required to pay you anything. However, there are a few reasons why the insurance company may opt to voluntarily send you an ex gratia payment to help you with your loss: If you file a lawsuit and the insurance company thinks it will cost more to go to court and fight the claim, it may opt to send you this payment instead. This decision helps the insurer save money. Similarly, if your policy language is ambiguous and there’s a reasoned argument from an insurance coverage counsel, your insurer might decide to pay part or all of the claim to avoid going to court. The insurance company is worried about losing your business, especially if you’re a long-term customer who pays large premiums. The insurance company doesn’t want to lose this business, so to encourage you to stick around, it may make a voluntary payment to show goodwill. Ex gratia payments don’t happen only in the insurance industry. An employer may give these voluntary funds as a part of a severance package, and the government also has been known to pay them. No matter which organization pays them, ex gratia payments are a way of showing kindness or goodwill to someone. What Do Ex Gratia Payments Mean for You? Even if an insurer denies your claim, there is a chance that you still may receive funds from your insurance company in this way. However, because these payments aren’t legally required, you shouldn’t count on one to help compensate for your losses. Instead, it’s much better to have the proper amounts and types of insurance in place so that any claims go through as expected. In some parts of the world, ex gratia payments have tax implications. If you get one from your insurance company, it's worth checking with a tax accountant to make sure you know what (if any) taxes you'll need to pay on it. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Miller Friel PLLC. "Shush, Don’t Tell Anyone: Insurance Companies Pay 'Uncovered' Claims." Accessed Sept. 16, 2021. Prism. "Prism Glossary and Terms." Accessed Sept. 16, 2021.